Intel's struggles have reportedly drawn the interest of competitors and private equity investors looking for a takeover opportunity for what is still a sizeable and potentially strong company. With rumors swirling regarding the future direction of this company, is now a good time to buy its beaten-down stock?
The idea that Intel could be a potential takeover candidate would have been laughable two decades ago when the company was the dominant chipmaker for personal computers (PCs). Back then, it had rightly earned the moniker of Chipzilla for its ability to intimidate and dominate competitors. However, as the semiconductor market has expanded into larger areas such as data centers and smartphones, Intel has failed to keep up with many of its chipmaking rivals.
Intel has fallen so far that, according to reports, Qualcomm (QCOM 0.79%) recently approached Intel about a potential acquisition. Such a merger would help the wireless chip manufacturing leader diversify its business into other areas outside of smartphones and tablets.
If the reports are true and a takeover is initiated, there would likely be a lot of hurdles in getting such a deal approved in the current regulatory environment. Several recent chip deals among large players have been rejected by regulators in recent years, including Nvidia trying to buy Arm from SoftBank, Broadcom trying to acquire Qualcomm, and Qualcomm looking to buy NXP Semiconductor. Why Qualcomm thinks it could push through a deal to acquire Intel is unknown, and it is possible it may be looking to buy just a certain segment of its business, such as its smaller data center chip business.
Meanwhile, Bloomberg recently reported that asset management company Apollo Global Management (APO -0.48%) has offered to invest as much as $5 billion into the company. The investment is said to be "equity-like." It's unclear whether it's a stock buy or perhaps could be convertible bonds or preferred shares. Apollo previously invested $11 billion in a joint venture of Intel's Irish foundry (chip manufacturing plant).
Intel does not appear to be hurting for cash, with $29.3 billion in cash and short-term investments on its balance sheet. It also owns a large percentage of MobileEye and is looking to eventually take Altera public. The company also recently announced plans to turn its contract manufacturing business, which manufactures chips for other chipmakers, into an independent subsidiary, which could be the first step in spinning off this money-losing business as well. It does have $53 billion in debt, but the company does not appear stressed and in need of a cash infusion.
The one thing both Qualcomm and Apollo see is a cheap stock when you dig beneath the surface. Intel currently trades at a forward price-to-earnings (P/E) of 19 times next year's analyst estimates, which on the surface appears cheap. However, its struggling foundry business is generating some large losses, which suggests the valuation is down for the wrong reasons. Selling or spinning the foundry business off would help highlight the inexpensive valuation of the company's core product business.
Based on how its core product business is currently performing, I think it is trading at forward P/E of under 11 times (this assumes about $12 billion in product segment operating income, a 25% tax rate, and 4.3 billion shares, equaling earnings per share of about $2.10). Suddenly that's pretty inexpensive, and there is still value in its other segments (Altera, MobileEye, and foundry).
Another way to look at how cheap Intel is trading is to look at it on a price-to-tangible book value measure, where it currently is trading just above 1.15 times. This basically means the company is trading just above the liquidation value of its assets. That's not typically a valuation you see for a tech company.
Even without a buyout or cash infusion, Intel should have options to help spur a turnaround in its stock just by starting to get rid of some of its underperforming businesses. Spin off the money-losing, high-capital-expenditure foundry business (along with some of its debt) and the struggling Altera (planned for 2026), and then the stock will look a lot more attractive.
Such a plan would undoubtedly cause the stock to rally, without the need of any outside buyers or large investors. I'd be a buyer of the stock more on this potential than on the hopes of outside help.